Innovation: Making Inspiration Routine

In April, A.G. Lafley, the chairman and CEO of Procter & Gamble (NYSE:PG), and Ram Charan, adviser to such business leaders as Jack Welch and Robert Nardelli, published an insider's guide to innovation at P&G and other top corporations. The Game-Changer: How You Can Drive Revenue and Profit Growth With Innovation argues that innovation -- like learning -- must be continuous and pursued at all levels of the organization. The book describes dozens of mechanisms for keeping the idea pipeline full, such as P&G's customer-immersion programs, which send employees to live in consumers' homes, and innovation "hot zones," facilities where product teams spend weeks on creative exercises.

It's a great book, but for owners of small companies, it's a little like reading about Disney World when all you have to play with is a backyard swing set. We wondered: Could P&G's approach to innovation be made to scale for businesses with a tiny fraction of P&G's resources?

We asked Lafley and Charan to imagine they were the founders of a company in an industry of their choice, with $4 million in revenue and 30 employees. What would they do to make their business as innovative as possible?

First, an observation about the Disney World analogy. P&G relies on innovation to drive growth; and, yes, it has developed a very effective arsenal of programs, processes, and techniques to generate ideas andconvert them into revenue. It has no choice. P&G operates in more than 150 countries with 85 on-the-ground operations, and it has 138,000 employees in 21 business divisions. This diversification, complexity, and bureaucracy can become innovation's enemies. Small companies may seem like backyard swing sets by comparison, but backyard swing sets are where children's imaginations roam free. In fundamental ways, small companies have significant advantages over large corporations when it comes to innovation. Where small companies generally fall down, however, is in building disciplines around the creation, capture, and execution of new ideas. Most small companies develop from a single great notion, usually the brainchild of a brilliant founder. But entrepreneurs can't afford to remain the sole font of innovation at their businesses any more than they can remain the sole salesperson. Nor can they rely on the passions of their staff and the mental sparks created when 30 people interact each day in close quarters. Innovation requires work. Workrequires structure. For companies,invention is 1 percent inspiration, 49 percent perspiration, and 50 percent smart routine.

Inc. asked us to choose an industry for our imagined company, and the swing-set reference put us in mind of toys. For this exercise, toys also have the advantage of being a consumer product that P&G is not involved in. We narrowed our focus to nonelectronic playthings, a category in which we must innovate to appeal to generations weaned on computers. Our goal is to design processes that will ensure that our growing company innovates repeatedly and reliably.

1. Select the Strategy Looking for an underserved market

Our first step is to ask ourselves: Where do we play? Invading adjacent markets and inventing whole new business categories is tempting, especially for entrepreneurs with low boredom thresholds. But this is a small company, and we don't have the resources to create a new customer base or extend the brand. So we will look for ways to understand our existing customers better and segment them. Interestingly, segmentation itself can be an innovative act, if we identify a corner of our market that is rarely treated as a segment. Can we look at toy buyers through some other lens than such tired demographics as gender, age, and income? For a small company, identifying an overlooked segment is less expensive than inventing a new technology and may sprout even more opportunities.

2. Connect to Customers The social network as idea collector

The best pointers to that elusive new market are parents and children themselves. But how will we reach them? At P&G, many of the best ideas are born of customer-immersion experiences. About 70 percent of P&G executives have spent several days either in a customer's house -- eating, playing, and shopping with the family -- or in a small shop, working behind the counter. But with a staff of 30, our toy company can't spare employees to spend days or weeks observing 6-year-olds at home and school to understand what incites their imaginations. Instead, most ideas will have to come from employees. So we will hire creative people and make them conduits to consumers. And we will teach them to sharpen their observational pow ers during the course of their everyday lives.

The concept of social networks has become commonplace; generally, companies use them to push out marketing messages. In our company, we will use such networks to pull in ideas. We will require every employee to conduct ongoing conversations with his or her own social network -- at least five friends or relatives who have children -- about what they and their kids look for in toys. To get them started, we will create a discussion guide or list of questions. "What parts of the toy store does your child gravitate toward? Does he prefer toys that allow him to create things or that challenge him to solve a problem?" We will ask employees to occasionally film their children and their friends' children at play. Then we will review those videos and look for patterns or anomalies. And we will keep asking questions. "Why did the child prefer this toy over another? What does her body language tell us? What might she have been thinking or feeling?"

We will give our social networks a good shake, and now we imagine an idea tumbles out. Among those subjects we observe are children with learning disabilities, who engage differently with some ordinary toys. Their parents work hard to find games at which they can succeed, and in conversations with our employees the parents emphasize their children's strengths. We see an opportunity: toys that allow children with special needs to make the most of their individual talents. This meets our requirement for creating a new market segment.

3.Generate Ideas Brainstorming done right

Our focus narrowed, we begin the process of identifying potential new products. At this point we will bring members of employees' networks into the office to brainstorm. Fortunately, P&G's brainstorming practices are perfectly scalable. For example, session leaders ask participants to write down their ideas on a big sheet of paper rather than leave that chore to the facilitator. That forces participants to refine their thinking. Session leaders use props: P&G's or a competitor's products, or bits and pieces of relevant materials. They discourage negative comments and tolerate -- even encourage -- digressions. As we continue to pursue new ideas in this category, we will hold employee-consumer brainstorming sessions every quarter.

And we will invite child psychologists, teachers, and nurses to join those sessions. While we have these experts in the office, we will also ask them to view the videos made earlier in the process and point out signals we may have missed. Again, our goal is to develop a staff so interested in and knowledgeable about children that staff members revert to field-research mode whenever they are around children. In small companies, some people invent and many people execute, but everyone must observe.

As a result of brainstorming, talking to their social networks, and constantly observing children, employees will naturally start generating ideas. But many of those ideas will have the brightness and weight of balloons; lacking ballast, they will tend to drift off into the ether. Rather than have employees bombard us with one-sentence, off-the-top-of-their-heads e-mails, we want them to add that ballast on their own. So we will ask them to compose one-page, detailed descriptions of their ideas, accompanied by a sketch rendered digitally or in pencil (or even crayon -- this is a toy company, after all). That will help us understand the concept and make it easier to discuss with others. We will also ask that before submitting ideas they pair up with another employee, much like how members of Congress seek co-sponsors on proposed legislation. That partner can help them hash out details and identify potential objections and obstacles. If the project is approved, the two will continue working as a team, which fosters collaboration.

4. Select an Idea Time to separate the good from the great

Now that we have a process for harvesting ideas, we will have to cull them. Although we will have our own pet projects, we won't let emotion override practicality. So we will set criteria based on projected revenue and profit goals, and view proposed projects collectively, as a portfolio.

We also want input from employees and, ideally, potential customers. For this, we will borrow the format of P&G project reviews. Once every quarter, project teams will create displays that lay out their ideas, sketches, market research, and other relevant material -- no more than fits on a poster board. We will place the posters on easels where staff members can view them. We will also ask employees to invite one or two kids from their social networks to take a look. As we examine the posters, we will ask their creators questions and make comments and suggestions, and urge employees to do the same.

Good leaders reward behavior they desire, so creating an incentive system for innovation is critical. At this stage in the company's growth, we will keep it simple. We will give small awards -- $100, perhaps, or dinner for two -- for ideas we like. We will make those awards at the quarterly review, to publicly celebrate the ingenuity of our staff. Later, if we proceed with any of those ideas, their creators might receive $500. For ideas we take to market, we will pay more.

5.Prototype and Test Bring on the customers

Say we have chosen one idea to pursue: a puzzle that can be assembled into any kind of picture based on a child's imagination rather than the way pieces fit together. The goal now is to quickly get some version into children's hands. Innovative small companies excel at performing inexpensive, frequent experiments. For that reason, prototypes are our friends. We may be able to create the initial design ourselves, using simple prototype software. But we will also hire an outside company to produce physical prototypes, which can often be done for a few hundred dollars. Prototypes are enormously important. With consumer products especially, the sooner you have a visual, the sooner you can start making adjustments based on specific feedback and suggestions.

Prototypes in hand, we will invite members of employees' social networks -- which by this time have become like our own extended family -- to the office for a play party. We will include both children with special needs and those without. Why the latter group? From these children we may gain additional insights into our target market and also, potentially, ideas for innovations in new markets down the road. As always, we will observe all the children carefully. And we will bring back those teachers and nurses to tell us what they see.

Much as we value the tangible, we won't want to waste money producing prototypes in every color, shape, and texture imaginable. So we will bring to the party other products, such as clothes or chairs or dishes, that reflect those characteristics and see which the children like best. We won't show them food items or other toys, because with items of that nature, a personal preference for the thing itself might influence their decisions.

6. Go to Market Cookies versus cookie dough

After all that brainstorming and observing and prototyping and testing, we will be lucky to find two products a year worth bringing to market. That's fine: A company of our size will likely stumble if it reaches for more. And we won't necessarily worry about perfecting those products ourselves. As a small company, we may have difficulty manufacturing and distributing our products on a large scale, so we will be open to partnership with a large competitor. (Even P&G has gone this route -- for example, collaborating with a competitor like Glad.) Big companies are always scouting for innovative products they can add to their portfolios. Often they prefer not a finished product but one that is half-baked, so that their own designers and engineers can contribute to the recipe. We won't insist on offering cookies if we gain more by offering cookie dough.

7. Adjust for growth The process evolves

As our company grows, so will the resources we devote to innovation. When we get to 50 or 100 employees, we will hire four or five innovation leaders -- executives with curiosity, openness to all ideas regardless of origin, and a high tolerance for risk. We will deploy these leaders in different parts of the company so that creative energies are expended on creating innovative internal processes as well as innovative products. The person who devises a brilliant strategy for recruiting great employees is as valuable as our most talented designer.

With more staff, we will gain the luxury of a little -- just a little -- more time for all. We will use some of that to further ingrain innovation into our routine. Employees will continue to work their social networks, but we will also initiate weekly internal idea meetings. They may last no more than 30 minutes to an hour, and everyone will be invited. Three times a month, we will spend those meetings brainstorming -- spreading a fine-weave net to capture small, inchoate ideas that pop up as employees attend conferences, listen to the news, and otherwise engage in work and life. Once a month, we will discuss ideas we are already pursuing to evaluate which are progressing well and which should be put out of their misery. All ideas, even innovative ideas, are not created equal. We want to kill the weak ones before they sap too many resources from the strong.

More money and more people mean more structure, but we also want to preserve the energy and spirit that, as we said at the beginning, are among small companies' greatest strengths. So while we continue to observe customers and potential customers at play, we will also observe our employees at work. For example, we may no longer preside over all the brainstorming sessions -- in fact, we will train employees in brainstorming techniques so they can take the helm -- but we will sit in frequently. Are the social dynamics still conducive to creativity? And we will make sure our innovation leaders are developing not just creative products and processes but also creative people. Are they coaching employees on how to flesh out intriguing but amorphous ideas? Are they listening to new employees with the same attention they give to veterans?

Companies love to say innovation is in their DNA. But that means more than having a founder and employees who are naturally creative. We will give our creative employees the tools and systems they need to turn their brilliant ideas into real, profit-generating products. And we will demonstrate through our continued success that innovation routine is not an oxymoron. It is a mandate.